Introduction to Indian Financial System
Dr. Harmandeep Singh
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Introduction
It intermediates between the flow of funds belonging to those
who save a part of their income and those who invest in
productive assets. It mobilizes and usefully allocates scarce
resources of a country.
A financial system is a complex, well-integrated set of subsystems of financial institutions, markets, instruments, and
services which facilitates the transfer and allocation of funds,
efficiently and effectively.
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Financial
System,
Savings
Finance
Investment
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Capital
Formation
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Video - 1
● https://www.youtube.com/watch?v=MsPgw4FodgE
● https://www.youtube.com/watch?v=WHAI1Rx418k
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Components of Financial System
Financial System
Financial
Assets/Instruments
Financial Markets
Financial
Intermediaries/Institutions
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Financial Institutions (Intermediaries)
Financial Institutions provide three transformation services
Liability, assets and Size transformation
Maturity transformation
Risk Transformation
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Classification of Financial Institutions
● Banking and Non-Banking
Example-HDFC, SBI, NBFC, DFI, Housing finance
● Term Finance
Example-IDBI, ICICI, IFCI, SIDBI
● Specialized
Example- EXIM, TFCI, NABARD
● Sectoral
Example- NABARD, NHB
● Investment
Example-LIC, GIC
● State level
Example- SFCs, SIDCs
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Let See Some Data-Banking
● The Indian banking system consists of 12 public sector banks, 22 private
sector banks, 44 foreign banks, 43 regional rural banks, 1,484 urban
cooperative banks
● According to the RBI, bank credit and deposits stood at Rs. 108.6 trillion (US$
1.48 trillion) and Rs. 151.34 trillion (US$ 2.06 trillion), respectively
● Asset of public sector banks stood at Rs. 107.83 lakh crore Total assets
across the banking sector (including public, private sector and foreign banks)
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Financial Markets
Financial
Markets
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Money
Market
Capital
Market
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Money Market
Money market is a market for short-term debt instruments (maturity below
one year).
It is a highly liquid market wherein securities are bought and sold in large
denominations to reduce transaction costs.
Call money market, certificates of deposit, commercial paper, and
treasury bills are the major instruments/segments of the money market.
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Capital Market
A capital market is a market for long-term securities (equity and debt).
The Capital Market is the market for trading in medium – long term assets.
The main purpose of the Capital Market is to facilitate the raising of longterm funds.
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Did you know?
The main issuers in the Money Market are the Government,
banks and private companies, while the main investors are
banks, insurance companies and pension and provident funds.
The main issuers in the Capital Market are the Government,
banks and private companies, while the main investors are
Individual, Institutional and foreign (FII, FDI)
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Segments of Financial Markets
Primary Market
Where securities are created or issued
Where securities are traded for very first time
Secondary Market
It refers to the market where those securities traded which have already been
issued in the primary market – BSE NSE- through stock brokers
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Financial Instruments/Assets
Financial instruments represent paper wealth shares, debentures, like bonds and
notes.
Features
Marketable
Traceable
Tailor Made
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Financial Instruments/Assets
Term
Short, Medium Long
Type
Primary Securities
Equity Preferences Debt and Combinations
Secondary Securities
The Deposits, Mutual Funds, Insurance Policies
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Informal Sector
Moneylenders
Local Bankers
Traders
Landlords
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Key Elements of Well-Functioning Financial System
(i) a strong legal and regulatory environment,
(ii) stable money
(iii) sound public finances and public debt management
(iv) a central bank
(v) a sound banking system
(vi) an information system, and
(vii) a well-functioning securities market.
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